Funding an Australian Startup

Bugherd Investment

After my previous post about why Macropod chose to stay in Australia, I received quite a few questions about raising money in Australia vs raising in the US and about our experience funding a startup generally. Whilst my post was quite personal, and very much about our journey, it seems to have resonated quite strongly with a lot of readers. However, my story certainly wasn’t intended to be prescriptive, so if you’re considering whether to raise here or across the pond there’s a lot more to consider than just what worked for us.

The first consideration when you’re looking to raise (or indeed when you’re looking to incorporate) is where your target customers are. Whichever country you head to, local investors have the network and experience you’ll need to address that market, and that experience is often invaluable for an outsider. If you’re holy grail is to take over the US, then pack your shit right now and get on a plane to US. But, if on the other hand, you’re targeting Asia, then really you should consider raising in Asia. For our business, we have as many customers in the UK, Germany and places like South Africa as we do in the US. There is literally no more reason for us to be based in the US than there is to be based in Germany. To each their own, but think carefully before you commit.

The other thing you should be aware of is the misconception that there just isn’t any money here in Australia. In terms of VC investment as a percentage of GDP then sure, we’re minor league compared to the US (0.021% vs 0.1%). However, on the flip-side, there are also significantly fewer startups out there actively raising funding. So whilst there aren’t too many VCs that will fund a $10M round, the odds of filling out a seed round or small Series A are actually pretty bloody good. Ultimately, no matter where you choose, if you’ve got a great business you will be able to find money.

The biggest challenge in Australia is that the startup community is really not very tightly knit. There’s no Palo Alto or Mountain View here. There’s a lot of stuff happening in a lot of cities all over the country and it can make building a network a bit of a challenge. If you’re new to the game, the easiest way to build that network is by getting into one of the various incubators or co-working spaces around the country. Even then, it takes a serious amount of hustle to find where all that money is hiding…there’s no Sandhill Rd here either. You’ll need to shake a lot of hands and buy a lot of coffee to get anywhere.

Even with access to money, it’s not all smooth sailing. If you speak to many international investors, the first piece of advice they’re likely to give you is, “get out of Australia ASAP”. The consensus with these folks is that quite simply there are too few experienced investors here. They believe that we just don’t have the resources available that they do in the US, and that you’re reducing your chances of success every day that you stay in Australia. They’re not saying that that our people aren’t smart, it’s just that they don’t have the personal experience of having founded, grown or exited a big tech business. It’s still helpful, but obviously it’s a far cry from the sort of experience you’d find in the Valley.

This difference in experience doesn’t just affect the advice you’ll received, it also means the questions you’ll be asked by most Aussie investors are also in stark contrast to the questions you’ll get in the US. Here it’s about ensuring they find a way to an exit, but over there it’s more about how big that exit will eventually be. It’s the difference between “what’s your revenue projections for the next 12 months?” and “how will this be a $100M business?” In my experience at least, Aussie investors ask questions focused on the short term, US investors want to know about the big hazy future.

In the US, because there is so much more deal flow, they already know that a certain percentage of their portfolio will eventually exit, and they also know that they’re well equipped to help improve those percentages. From there it’s about maximising returns. They’ll ask the founder, “how are you going to change the world and how can we help you do it?” because they want $100M exits, not $10M exits. For a $1billion fund, a $10M exit doesn’t come close to moving the dial. That’s not true for the little Aussie fund with $20M to spend.

The first consideration for a big fund is whether there is a big opportunity if everything goes well. They really just want to know how big the upside is. It’s then a matter of evaluating whether there’s a team that can actually achieve the wild vision they’re pitching. Do they have a track record? Do they have the experience? Do they have a great team around them? Do they already have some traction? All of these things add together to increase the chances of an exit. It’s all just risk assessment. Combine all these things with the possibility of a big outcome and you’ve potentially got a good investment.

Contrast that with the average Australian investor. I’ve been asked for business plans, I’ve been asked for financial projections, I’ve been asked to justify our pricing model, and I’ve been asked for software patents. I even had one investor wanting us to show off our code to prove it was ours! This isn’t during due diligence, this is during a pitch! It was rare to be asked about our broader vision, the path to that vision or how we know that we’re uniquely positioned to achieve it. If anything, many of the investors I’ve spoken to actually got a little frightened when we talked of our big ideas and desire to conquer the world.

The reason for this is quite simple; small is achievable. Aussie investors are primarily concerned about you staying alive long enough to reach some kind of exit, not so much about how big that exit might be if you get there. As a result, the questions are far more about fact checking and more akin to doing due diligence than they are about your big bold future.

When you consider that historically Venture Capital in Australia has performed abysmally (an average loss of 5.4% from 1985-2007 (PDF)) it’s not altogether surprising that they’re more than a little cautious. The biggest risk for most VCs isn’t failure to reach 100x return, it’s the risk of not making a return at all. The result of those past failures is quite likely part of the reason why we have so few funding options today.

So we know that compared to the US we have far fewer, far smaller funds and far lower deal flow. That makes for very different investment strategies. When you only have enough money to make a few bets, and there’s not much to bet on, you’re going to be super cautious. It’s the difference between having enough money to bet on every horse race every week of the year versus betting all your money on the Melbourne Cup once a year.

Massively different strategies emerge simply because of the difference in scale. As an example, Startmate (arguably Australia’s leading accelerator) invests in about 6-8 companies each year. That’s about 40 investments over 5 years whereas 500 Startups have made well over 1000 investments during the same period. This isn’t a criticism of Startmate (We wouldn’t be here today without them), it’s just volume makes a big difference to the sort of risks you’re willing to take when filling out your portfolio. You need to keep all this in mind when you go to make your pitch.

But things are happening! Not only are there a tonne of new funds popping up, but there’s also a lot of money coming into Australia from overseas (US and Asia), not only in the form of investments into Australian funds, but international funds making direct investments into the top Australian startups (most notably Atlassian, BigCommerce and Campaign Monitor). It doesn’t ultimately matter where the funding is coming from though, as they say, a high tide floats all boats. As more startups manage to secure funding here in Australia, the more successful late stage companies we’ll see. This will result in more employment opportunities, more startup visibility, more entrepreneurial activity and ultimately more deal flow. Then, the cycle continues and grows.

Whilst things are improving here, there’s still a lot more that can be done. Whilst there’s $2 trillion (yes, with a T) wrapped up in superannuation funds in Australia, at the moment basically none of that money is making it’s way into Venture Capital. That needs to change. Schools and Universities are failing to deliver skilled, entrepreneurial graduates that are both capable and inclined to start a business. That needs to change. Government support is a bit of a mixed bag. The R&D and EMDG grants are a fantastic opportunity for Aussie startups, yet legal red tape around taxation, 485 visas and Employee Share Schemes are horrific to deal with. This too needs to change.

But when you weight it all up, the situation in Australia today is already 10x better than it was when we raised our first round in 2011, and I dare say it will continue to improve each year from now. With proper government support, even just a tiny bit of financial backing from superannuation plus a whole heap of courageous founders, Australia will soon start seeing the success it rightly deserves.

The most important thing to remember is that whatever city you were born in, or whatever country you’re raising from, opportunities are only what you make of them. The rivers may flow with gold in Silicon Valley, but there’s still hundreds of startups drowning anyway. Don’t confuse abundance with opportunity. Just go where your opportunities take you, and work your ass off when you get there.

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